Seniors housing: Still oversupplied

The national seniors housing sector as a whole will remain oversupplied until the first wave of baby boomers turns 60 in approximately five years, says Marcus & Millichap Real Estate Investment Brokerage Co.’s annual seniors housing report. Meanwhile, independent living facilities are enjoying a boost in production, while the construction of assisted living units has dropped dramatically over the past several years ago, the report adds.

Approximately 225,000 seniors housing units have been completed since the start of 1997. "This abundant supply has outpaced demand, resulting in a temporary glut of space in the sector, leaving many companies cash strapped as rent-up deficits mount and operating costs soar," said Gary Lucas, director of Marcus & Millichap’s Senior Housing Group, in a statement accompanying the report. "However, as the market digests the oversupply and baby boomers begin turning 40, the market will be relieved by an increase in demand."

As for the independent living sector, approximately 6,300 units are currently under construction —the highest number that property type has experienced in five years — as demand has begun to increase. Notably, nearly half of the independent living facilities under construction will not feature any assisted living units, a change from past construction trends. Marcus & Millichap attributes this to the fact that "independent living facilities have less stringent regulations and substantially lower operating costs than assisted living facilities."

The report also warns that "investors concentrating solely on the independent living sector in the short term may be doing their investment portfolio a long-term disservice. Over time, the residents of independent living facilities will require more acute care, which is available in assisted living facilities, continuing care retirement communities and skilled nursing facilities."

Standing in contrast to the independent living sector is assisted living. Approximately 8,000 assisted living units are now being built, the report says. As recently as 1998, there were 33,000 such units under construction. "Once a Wall Street favorite, the assisted living sector has been hit hard by lack of financing," the report states. "Many owners have been left with large operating deficits due to slower than expected lease-up schedules. In order to achieve stabilization more quickly, many operators have been forced to reduce monthly rents, leaving many facilities unable to service debt."

The report also notes that the development of continuing care retirement communities (CCRC) has declined considerably in recent years. About 5,400 CCRC units are currently under construction. In 1999, approximately 18,000 units were under construction. Why the decrease? Marcus & Millichap attributes the decline to the substantial upfront construction and operating costs associated with CCRCs.